Government clarifies eligibility for lower company tax rate

The Government has introduced the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 (the Bill) into Parliament, which clarifies that a corporate tax entity will not qualify for the lower corporate tax rate of 27.5 per cent if more than 80 per cent of its assessable income is income of a defined passive nature. For further, details refer to the media release issued by Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP.

Following consultation on the earlier Exposure Draft legislation (on which PwC lodged a submission), this Bill differs in a number of respects. In particular, there is no longer any requirement that a company be carrying on a business to qualify as a ‘base rate entity’, and ensures that net capital gains (as opposed to gross capital gains) are included in working out base rate entity passive income. Furthermore, the measures no longer have retrospective application and only apply from the 2017-18 income year. Refer to the Legislative Update for further details and the Tax Insights[1] .

ATO guidance on when a company carries on a business for tax rate purposes

The Australian Taxation Office (ATO) has issued Draft Taxation Ruling TR 2017/D7, which provides guidance on when a company carries on a business within the meaning of section 23AA of the Income Tax Rates Act 1986 (Cth) (ITR 1986).

As currently enacted, to be eligible for the reduced company tax rate for the 2017-18 and later income years, a company must qualify as a base rate entity as defined by section 23AA of the ITR 1986. Given the proposed change to remove the carrying on a business requirement as noted above, it is clear that the draft ruling will need to be revised in the context in which it has been issued. Note that to qualify for a lower tax rate for income years prior to 2017-18, a company has to be a ‘small business entity’ which requires that it carry on a business and also meet the applicable aggregated turnover requirement.

According to the draft ruling, the question of whether a company is carrying on business must be considered in each context of income tax law, by reference to the particular provision in question and its purpose. The draft ruling makes reference to various indicia which have been considered by Courts in determining whether a business is being carried on. These include:

●the nature of the activities, particularly whether they have a profit-making purpose

●whether the person intends to carry on a business

●whether the activities are repeated and regular, and organised in a business-like manner, including the keeping of books, records and the use of a system

●the amount of capital employed in those activities, and

●whether the activity is better described as a hobby, or recreation.

Comments on the draft ruling can be made until 1 December 2017.

ATO’s large corporate groups income tax gap

The ATO has released its large corporate groups income tax gap analysis. According to the ATO’s analysis, the size of the income tax gap for the large corporate group sector, which covers some 1,400 groups each with a turnover of more than AUD250 million, is estimated at AUD2.5 billion or 5.8 per cent in the 2014–15 fiscal year. This is said to “reflect[s] a tax system that is operating well. It demonstrates a high degree of voluntary compliance, and compares well globally”. It is also stated to be similar to comparable jurisdictions and represent a relatively small proportion of the total corporate income tax base.

The ATO’s publication provides a ‘whole picture’ view of the complexity of Australia’s corporate tax system; covering ways the ATO is seeking to improve the system for those who want to comply, and how it takes firm action against those who choose not to comply.

R&D fraudsters in the Government’s sights

The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, has warned that criminals seeking to defraud the Commonwealth through fraudulent Research and Development (R&D) tax incentive claims are being put on notice by the Serious Financial Crime Taskforce (SFCT). The SFCT is actively pursuing taxpayers who make claims which they are not entitled to, and R&D tax offset claims will be scrutinised for blatant abuse.

Accounting for interest and penalties relating to income tax

In September 2017, the International Financial Reporting Standards (IFRS) Interpretations Committee (IC) issued a decision on interest and penalties relating to income taxes. The IC determined that it would not develop any guidance on accounting for interest and penalties as the benefits of improvements in financial reporting from such a project would not outweigh the costs.

The IC observed in its decision that entities do not have an accounting policy choice between applying IAS 12 Income Taxes (IAS 12) and applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets (IAS 37) to interest and penalties related to income taxes. If an entity considers that a particular amount payable, or receivable, for interest and penalties is an income tax, IAS 12 is applied to that amount. If an entity does not apply IAS 12 to an amount payable or receivable for interest and penalties, it applies IAS 37 to that amount. For further information refer to the Straight Away Alert IFRS Bulletin.

Voluntary Tax Transparency Code – AASB draft guidance FAQs

The Australian Accounting Standards Board (AASB) has released a set of frequently asked questions (FAQs) that were raised in a recent webinar on the voluntary Tax Transparency Code (TTC). During the webinar, a number of questions were asked about calculating effective tax rates (ETRs). The draft AASB guidance on the Tax Transparency Code is open for comment until 28 February 2018.